Bank of Korea lowers rates for the fourth time to spur growth

South Korea’s central bank cut its policy interest rate by 25 basis points to 2.50% at its rate-setting meeting in Seoul on Thursday. The BOK also published its quarterly update of macroeconomic forecasts, which predicted much weaker economic growth this year, at 0.8%, down from February’s 1.5%.

BOK’s seven-member board voted to cut its benchmark interest rate to 2.50% at its monetary policy review, an outcome expected by all 36 economists polled by Reuters on May 27th. The South Korean central bank aimed to boost economic growth amid sluggish domestic demand and uncertainties stemming from Washington’s sweeping tariff scheme. 

The BOK held the policy rate steady at its previous meeting in April, citing the need to support the weak local currency and assess the evolving impact of new U.S. tariff measures. However, six of its board members were open to lowering the rate. 

Lee and Kim welcome the fourth rate reduction since last year

South Korea’s central bank cut its policy interest rate by 25 basis points in a decision announced Thursday as the country faces a double-whammy of protracted political turmoil and Trump’s sweeping tariffs.
The Bank of Korea reduced rates to 2.5% from 2.75%, its lowest level…

— Ajay Bagga (@Ajay_Bagga) May 29, 2025

Today’s rate cut marked the fourth reduction since October 2024, when the BOK began a monetary easing cycle for the first time since August 2021. The central bank has since lowered the policy rate by 1 percentage point through May. The Bank of Korea reduced rates from 2.75% to 2.5%, its lowest since August 2022. 

Thursday’s decision came just five days before the country’s presidential election on June 3, and both leading candidates, liberal frontrunner Lee Jae-Myung and right-winger Kim Moon-soo, welcomed the lower interest rates. They pledged immediate spending to restore the country’s economic growth dragged by six months of political turmoil since the December 3 martial law decree.

South Korean leaders are also racing to strike a deal with the U.S. government before the July 8 deadline. Both sides stated they aimed to agree on a tariff package and economic cooperation by then. Still, the South Korean Minister for Trade and Industry said there was not enough time recently, and the upcoming election could delay it further. 

“Ongoing trade talks with the US, as well as Fed cuts likely coming only in December 2025, in our forecast, all warrant gradual easing from the BOK.”

–Bum Ki Son, Economist at Barclays

Bum also pointed out that a fiscal stimulus package had already been delivered, and a second one was likely in the second half of the year. South Korea’s economy unexpectedly contracted in Q1, shrinking 0.1% from a year earlier, as exports and consumption stalled amid fears over the impact of Trump’s tariffs.

Bum believes the pace of future cuts could fall short of market expectation

Bum said the pace of future cuts could fall short of market expectations, as he saw another 25 basis point cut by the BOK in October. The central bank also slashed its full-year GDP forecast for 2025 to just 0.8%, considerably lower than the previous projection of 1.5%. 

The Bank of Korea monetary policy board attributed its Thursday rate cut decision to expectations that economic growth would decline considerably while inflation remained broadly stable. The board also stated that it would maintain its rate cut stance to curb downside risks to economic growth and adjust the timing and pace of further base rate cuts while closely monitoring domestic and external policy environment changes.

23 of 36 economists polled expected the key interest rate to fall from the current level to 2.25% by the end of next quarter, a view broadly unchanged from the previous poll. However, a slight majority, around 56%, forecasted an additional 25 basis point cut by the end of the fourth quarter, bringing the rate to 2.00%, a quarter percentage point lower than in the previous poll conducted in April. Data showing inflation close to the bank’s 2% target and a weaker outlook for domestic activity due to external uncertainties supported arguments for further easing.

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